You’re going to start hearing the term ARR a lot. We’re not talking about augmented reality but annual recurring revenue. It’s not a new term, as it’s a core tenet of SaaS-based businesses. It’s actually the SaaS attribute that has made the model a venture-investment darling over the past decade.
Recurring revenue signals stability and mitigates risk which are fundamental principles in nearly every investment thesis. And it’s become popular beyond Saas, making its way to the surge in consumer subscription services. That’s everything from how we pay for Microsoft Office to shaving supplies.
But ARR has mostly lingered in the background as the tech press’ spotlight has chased shinier and sexier topics over the past few years. That of course includes the voyeuristic obsession with unicorn valuations, or the “if it bleeds it leads” schadenfreude around unicorn flameouts like WeWork.
The latter actually brings us to ARR. After reaching peak unicorn obsession over the past few years — and the well-known circumstances therein — the pendulum is now swinging in the other direction. That backlash to massive valuation and capitalization without profit is bringing fundamentals back in style.
“It’s a down to earth metric as it were. And attending to such KPIs is cool again,” said my colleague Charles Lauglin during a recent Slack discussion about ARR. This backlash is also related to an analyst roundtable (below) where we discussed the unicorn backlash and a return to board responsibility.
Boards of Directors are actually to blame for the runaway delusion that sunk WeWork and others like it, asserts Neal Polachek. The issue is that it’s a slow progression of deviant behavior, during which everyone’s getting paid… until they’re not. It’s harder to play devil’s advocate when the money is flowing.
But now that the pendulum swings in the other direction, there’s lots of momentum behind public awareness and perception of business fundamentals. The result will be board members that speak up (plus more carefully-constructed governance), and more attention to things like unit economics.
That brings us back to ARR. Though it isn’t new, it’s getting invoked with greater frequency. We predict some quantity of ARR ($100 million?) is the next unicorn metric, replacing $1-billion+ valuation. The term unicorn itself will also go away, as it’s not only passé but its subjects are paradoxically commonplace.
It won’t just be ARR that gets more ink, but other fundamentals that got the Rodney Dangerfield treatment in past years. We’re talking EBITDA, free cash flow and others that become cool again. To be clear, these were always key metrics but it’s a question of media coverage… which seeps into the culture.
For more, see our analyst roundtable below, Laughlin’s article on unicorn backlash, and articles like this which frame success factors in terms of ARR. It’s also worth noting, if it wasn’t implied above, that this will all apply to LSA’s bread & butter topic of SMB Saas. We’ll keep a close eye on it.